Keynote 3: Innovative Finance in Education

Keynote 3: Innovative Finance in Education

CABRI Education Dialogue

Serena Guarnaschelli, Dalberg Global Development Advisors26 February 2013

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• Share knowledge about current practices in innovative finance• Align financing mechanisms with current challenges for education• Provide recommendations for next steps

Objectives

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`Overview of Innovative Finance

Overview of Current Financing Models for Education in Africa

Analysis of Innovative Finance Models for Education in Africa

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Innovative Finance encompasses a wide range of initiatives, such as global taxes, social bonds and blended funds

Channels

Description ExamplesType

Mobilize extra funding either through mandatory (tax) or voluntary (philanthropic) contributions

• Taxes and levies• Voluntary contributions and

donations• Debt swaps• Lotteries

Airline Solidarity Contribution/Tax applied

when passengers purchase tickets

Instruments and Vehicles

Connect financial markets with the benefits of development and structures and institutions that correct informational asymmetries and capture efficiencies

• Bonds• Equity funds• Guarantees• Insurance• Private-Private and

Public-Private Partnerships

• Blended investments vehicles

Offers the opportunity to invest in “green” projects that help mitigate climate

change

Aims to develop investable infrastructure projects that

improve Brazilian development

PRELIMINARY

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Over the past ten years innovative fundraising mechanisms raised US$ 60 bn with a focus on environment, health and infrastructure…

Agriculture

Education

Energy and environment

Health

Infrastructure

• Investment funds• Guarantee funds• Partnerships (Information and

policy)

• Partnerships (Information and coordination)

• Investment funds

• Bonds• Investment funds

PRELIMINARY

Sample mechanisms Sample initiatives

• The African Enterprise Challenge Fund

• AGRA/Standard Bank• Transfarm Africa

• Asian Infrastructure Fund• Infrastructure Bonds• EBP

• Investment funds• Bonds• PPPs

• Levies• Bonds• Performance based funds

• Airline Solidarity Tax• IFFIm• Global Fund• GAVI Alliance

• Green Bonds• Adaptation Fund

• Global Partnership for Education

• 1Goal Campaign• Affordable Learning

Fund

Note: The estimation of market sizes, by sector, is complicated by a lack of common definitions and methodologies, and by the highly diverse nature of initiatives across sectors. The World Bank estimates that innovative fundraising generated US$ 57.1 billion in official flows between 2000 and 2008

Observed activity

Medium

Low

High

High

High

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Mechanism

… and generated valuable lessons for the design and implementation of new mechanisms

ExplanationInitiative

PRELIMINARY

Use of standard risk/return profiles from existing issuance programmes, high transparency

Green Bonds (US$ 3 bn)

Highly rated fixed-income products that support sustainable development

Grants and interest-free loans awarded to the private sector through competitive rounds

Strong and sustained business engagement based on private-sector principles The African Enterprise Challenge

Fund (US$ 150m)

Tobin taxTax on foreign exchange transactions

Lack of political commitment, unclear impact on economic activity

MassiveGoodBranding, communication and operational problems

Micro-fundraising scheme

IFFIm (US$ 3.6 bn)

Bonds to frontload future ODA commitments

International coordination, strong execution, scale

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Overview of Innovative Finance

Overview of Current Financing Models for Education in Africa

Analysis of Innovative Finance Models for Education in Africa

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Public funding and public use of funds are the dominant paradigm for educating children both in developed and in developing countries

%, by education level

Spending on Education in Africa

Source: UNESCO

100%

Household Contributions

Public and other private expenditures

Tertiary Education

100

22%

78%

Upper Secondary Education

100

44%

56%

Lower Secondary Education

100

49%

51%

Primary Education

100

30%

70%

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Within categories of spending, the vast majority of public spending is on teacher salaries

%,of current expenditure , by education level (2008 or more recent year)

Salaries Costs

Source: UNESCO

26

38

5556

69

Technical and Vocational Education

Tertiary EducationPrimary Education Lower Secondary Education

Upper Secondary Education

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Private sector funding for education in Africa is dominated by household expenditures on education

%

Sources of Education Financing for Madagascar and Benin

Source: UNESCO-IEP

27%29%

5%

Benin, 1998Madagascar, 1993

Income generated by schoolsExternal subsidies

7%0%

NGOs and private organizations

5%3%

External loans

100%

Households

Local administrations

Government52%

10%

0% 4%

56%

1%

1%

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Private equity funds are emerging to capitalize on this spending and in anticipation of increased enrolment in the future.

Note: Only funds disbursed to non-government actors in developing countries are included in this analysis. Analysis presented is meant to offer representative sample of grantors and impact investors, not to present a comprehensive view of all education impact investment activity. Many multi-sector portfolios include only 1 or 2 education deals. Foundation education portfolios for 2009 inclusive of both US and international grants.Source: Foundation Center - Top Education Grants 2009; Fund / investor websites, investor interviews; Dalberg analysis.

Open SocietyFoundations

Richard ChandlerCorporation

Kaizen PE

Carnegie Corporation

MacArthurFoundation

Ford Foundation

Dell FoundationEchoing Green

Deutsche Bank Foundations

Hewlett Foundation

GroFin Africa Fund

Acumen Fund

Omidyar Network Fund

Africinvest

Sequoia CapitalSONG Investment Management Company

Fanisi Venture Capital Fund

International Finance Corporation (IFC) Edu. Portfolio

Gray Ghost Ventures

Partnership for Higher Edu. in Africa

First Education Holding

Education-dedicated PortfoliosMulti-sector Portfolios

Grant-making investors Financial-first investorsImpact-first investors

TARG

ETED

BEN

EFIC

IARI

ES

Bubble size = ~$400M fund size

Most vulnerable

Middle income

Low income

Upper-middle income

Private donors and investors in education

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Overview of Innovative Finance

Overview of Current Financing Models for Education in Africa

Analysis of Innovative Finance Models for Education in Africa

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Within education, innovative financing mechanisms are being used to mobilize additional resources and improve the use of existing resources

Example Mechanisms

• Cash on Delivery (COD) • The Education Venture Fund (EdVF)• Indian School Finance Company (ISFC)• The 2010 FIFA World Cup Legacy Trust• Diaspora Bonds

Stakeholders

• International donors• Impact Investors (including both equity

and debt based approaches)• Philanthropic organizations• Diaspora community

Innovative Finance to Mobilize Resources

• Bridge Academies (Low-cost private education)

• Vouchers programs• Pay-for-performance

• Schools• Families and students• Teachers

Innovative Finance to Use Resources More Efficiently

Items in bold will be discussed in the following sides

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Mobilize Resources: The Education Venture Fund (EdVF)

Source: Results for Development; Dalberg analysis.

Objectives

• To provide access to capital for innovative “dual-purpose” projects • To mobilize finance and promote innovation in the education

sector• To develop standards and models for the industry

Size and Scale $55 million fund ($20 million grants and $35 million investments)

FeasibilityThe management is currently fundraising for the project.As the fund has not invested in projects yet, the impact cannot be evaluated to date.

Relevance and Acceptance

The Fund’s focus areas are South Africa, Tanzania, Uganda, Rwanda and Ethiopia.

Funding Source Impact investing and philanthropic capital

Status Currently fundraising

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Use Resources More Effectively: Bridge Academies

Source: Bridge Academies; Dalberg analysis.

Objectives• To launch a large-scale network of high-quality, ultra low-cost, for-

profit primary schools• To give every child access to high quality education

Funding Source• Private equity funds and venture capitalists• High impact philanthropy• School tuition

Status Launched in 2009

Size and Scale• 83 schools across Kenya catering for 26,000 pupils.• $4 per child per month

Feasibility

• Franchise-like model with standard curriculum, materials, training programs, technology, etc.

• BIA recruits school managers and teachers from the communities it serves.

Relevance and Acceptance Will vary depending on attitudes toward public education

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Use Resources More Effectively: Education Vouchers in Colombia

Source: World Bank. "Innovative Finance for Development Solutions.“; Dalberg analysis.

Objectives• To expand private provision of public services• To increase secondary school enrolment rates

Funding Source Government

Status Implemented in 1991

Size and Scale• More than 125,000 pupils • Vouchers cover more than half the average cost of private

secondary school.

Feasibility

• Operated in all large cities in the country • Targeted low-income neighbourhoods • Targeted students who attended public primary schools• Requires a private school infrastructure

Relevance and Acceptance

Voucher holders had substantially higher high school graduation rates and test scores

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• Successful innovative finance mechanisms must be closely aligned with the challenges of the country in which they operate.

• Three potential ways for governments to mobilize funds: – A philanthropic program (FIFA 2010 Trust Fund)– A bond or results based pay mechanism (Diaspora Bonds or Cash on Delivery)– Impact investment (The Education Venture Fund (EdVF) and the Indian School Finance

Company (ISFC))• Results-based-aid mechanisms and impact investing hold the most promise• Very few proven innovative finance models for education in Africa• Implementing new innovative finance models will require political coordination and support

Key findings from review of case studies

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Recommendations

How can policymakers

support innovative finance?

•Align mechanisms with country specific challenges•Assess political will to make changes•Ensure appropriate regulatory environment•Develop and promote public private partnerships

How can civil society support

innovative finance?

•Experiment with new approaches•Provide feedback to policy makers•Partner with the private sector

How can the private sector support

innovative finance?

•Demonstrate that low-cost private education is higher quality•Develop and promote public private partnerships to scale solutions

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Questions and Discussion

?

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Annex

`Additional Cases

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Mobilize Resources: Cash on Delivery (COD)

Source: Center for Global Development; Dalberg analysis.

Objectives To provide additional funding to developing countries in return for achieving progress against pre-agreed targets

Funding Source Official and private donors

Status In pilot stage

Size and Scale COD Aid needs to be additional and complementary to existing aid flows

Feasibility

• DFID is currently piloting a Result Based Aid Project in the education sector in Ethiopia, which shares many features with the COD model.

• Concerns that COD could create incentives for fraud

Relevance and Acceptance A focus on outcomes and a hands off approach

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Mobilize Resources: Indian School Finance Company (ISFC)

Source: ISFC; Dalberg analysis.

Objectives• To provide loans to affordable private schools• To build a network of affordable education solution providers

Funding Source Impact investors and capital markets

Status Founded in 2008 and currently operates in seven Indian cities

Size and Scale• 240 loans totaling $4.2 million by the end of 2010• 33,000 additional students attending private schools• 950 new school jobs.

Feasibility

• ISFC estimates that approximately 45,000 private schools for the low-income segment exist in India

• Loans are typically used for infrastructure investments (such as new classrooms, computer labs, and furniture), which allow an increase in enrolment and revenue

Relevance and Acceptance A focus on outcomes and a hands off approach

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Mobilize Resources: 2010 FIFA World Cup Legacy Trust

Source: FIFA Legacy Trust Fund; Dalberg analysis.

Objectives• To support education and healthcare initiatives of NGOs that use

football as a vehicle for community development • To promote football within South Africa

Funding Source Revenues of the 2010 FIFA World Cup

Status Selecting projects for funding

Size and Scale• $100 million, $80 million of which is allocated directly to social

community projects• A one time event focused on South Africa

Feasibility

• The trust will be administered by the international auditing company Ernst and Young while the trustees, consisting of representatives from FIFA, SAFA, the government and the private sector, will evaluate which public-benefit projects are funded

Relevance and Acceptance Education is one of four focus areas

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Mobilize Resources: Diaspora Bonds

Source: Leading Group for Innovative Finance for Development; Dalberg analysis.

Objectives• To raise large scale funding from overseas diaspora for the support

of national budgets and the filling of financing gaps in development programs

Funding Source International diaspora of country issuing the bond

Status Not implemented for education

Size and Scale• World Bank estimates suggest that annual diaspora savings of SSA

could be in the range of $5 to $10 billion.

Feasibility• Credit enhancements for diaspora bonds may be required • Diaspora would shift resources from remittances to diaspora

bonds

Relevance and Acceptance

May include conditions on management of educational investments and include incentives for countries to produce the desired results

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Use Resources More Effectively: Performance-based pay for teachers in OECD countries

Source: OECD; Dalberg analysis.

Objectives• To reward and motivate teachers who perform well rather than

paying all teachers equally• To link spending on schools and outcomes

Funding Source Public and private funding for schools

Status About half of OECD countries

Size and Scale Unknown

Feasibility• Requires consent of the teachers unions• Requires accepted approach to measure performance

Relevance and Acceptance Unknown